ESOP strategy

Today, there are plenty of issues that divide the United States, and few that can serve to unite those same states.

The ESOP model of employee ownership is one of those rare issues that frequently provides common ground for potential adversaries. And it has done so for decades.

A key reason for this mutual agreement is that research shows ESOPs benefit employees and businesses alike. So, unlike measures that promote one at the expense of the other, ESOPs draw support from business and employee advocates; from groups with conservative and liberal ideologies—and everything in between.

As our nation grows more polarized, and as its citizens and representatives grow farther apart, ESOPs increasingly are drawing together groups that traditionally would be at odds.

Chamber and CAP

The U.S. Chamber of Commerce—which traditionally holds a conservative view on public policy—recently endorsed ESOPs as one option its members can use to “offer quality retirement benefits to their workers.”

The Center for American Progress—which holds a more liberal view—began endorsing ESOPs in the past two years as a means of addressing growing wealth inequality. In one report, the organization states:

“Employee ownership can be a powerful tool to ensure that workers at all levels are able to share in the gains of a company’s collective performance. Research shows that employee ownership typically provides a host of benefits—not just for workers but also for businesses and investors. If these programs were to grow throughout the economy, they could promote broad-based wealth creation, thereby fostering sustainable economic growth and reducing inequality.”

As a result, the Chamber and CAP offer remarkably similar calls to action:

“Encourage ESOPs—promote the benefits of ESOPs and protect them from frivolous litigation and excessive regulation.” –U.S. Chamber of Commerce

“Increase tax incentives for the formation of employee stock-ownership plans, or ESOPs.” –Center for American Progress

Congressional Commonalities

The long-running bipartisan support for ESOPs was evident most recently in two identical pro-ESOP bills introduced in the last Congress.

In the House, HR 2096 was sponsored by 59 Republicans and 36 Democrats. In the Senate, S 1212 was sponsored by 17 Republicans, 15 Democrats, and 2 Independents.

Democrats and Republicans alike on both tax committees—the Ways and Means in the House, and the Finance Committee in the Senate—supported the bill.

Moderates also endorse ESOPs. The Third Way, a self-professed centrist organization, recently published a paper endorsing ESOPs. The paper also pointed out that ESOPs enjoy broad support from all sides.

The paper also notes that the Democratic Party platform endorsed profit sharing plans, and that Secretary Hillary Clinton “expressed strong support for the idea of employee stock ownership as another example of profit sharing.”

Rare Agreement

One of the two independents who sponsored S 1212 was Senator Bernie Sanders, an ardent supporter of average pay workers and a legislator known for his liberal public policy agenda.

Senator Sanders and President Ronald Reagan—who espoused conservative ideals—would have been hard pressed to find issues on which they agreed. But both agreed on the value of ESOPs.

Ronald Reagan was the staunchest presidential supporter of ESOPs our county has seen, helping to draw attention to ESOPs and spur legislation that promoted and protected them. And Senator Sanders began his bid for the White House by once again voicing his support for ESOPs, including sponsoring S 1212.

Moving Forward

The ESOP model of employee ownership possesses a rare power to unite us. And that power is needed today.

Perhaps instead of focusing so much energy on issues where our nation—and our members of Congress—are destined to disagree, resulting in rancorous debates, we should start by spending a little time focusing on areas where we agree. ESOPs offer a perfect opportunity to build agreement.

The article speculates that these factors give workers the peace of mind to take short-term risks in the interest of supporting the business’ long term health. HBR Senior Editor Walter Frick writes: “If failure in the short-term is acceptable or even rewarded, and if workers have a stake in the company’s long-term performance, they should be more likely to innovate.”

So treating workers well, giving them job stability, and incenting them to focus on the long term health of the company all spur innovation? Than ESOPs should be innovating in spades.

Here’s why:

ESOPs—and other employee owned firms—provide better job security. During the Great Recession, companies with employee stock ownership were four times less likely to lay off workers than those without such ownership, according to research conducted for the Employee Ownership Foundation.

Data from June 2015, when the economy was clearly out of recession, are even more compelling: Companies with employee stock ownership were more than seven times less likely to lay off workers than other companies in these economically healthier times.

ESOPs focus workers on the long term—perhaps more effectively than stock options. When employees become owners, they are more likely to be focused on the business and its long term interests. And ESOPs might be more effective at these goals than stock options.

ESOPs—because they are retirement plans, conceptually similar to 401(k)s and pensions—are generally easier to understand than stock options. What’s more, workers get these funds when they leave the company, or retire—long term decisions made by them, not the business.

And because ESOP funds are distributed only upon leaving the business or retiring, they encourage workers to focus on the business for the duration of their tenure, or even their careers. Long term, indeed.

Well-run ESOPs treat employees like owners. (In other words, well.) ESOPs may be well run or poorly run, but the ones that are run well encourage participation among employee owners, solicit their feedback, empower them to improve the business, and educate them on the financial inner workings of the firm.

When employee owners participate in running the business, they generally treat themselves well and with respect. (They would be foolish to treat themselves poorly, wouldn’t they?)

So by doing what they do naturally, ESOPs should do a superior job of spurring innovation. Just one more piece of evidence showing that ESOPs are good for employees and businesses alike.